Yen falls as carry resumes; Wall Street rallies

Dollar gains ahead of Federal Reserve's interest-rate meeting

WanfengZhou

NEW YORK (MarketWatch) -- The yen fell sharply against other currencies Monday, as risk appetite returned to the financial market, prompting investors to reestablish carry trade positions.

Carry trades refer to the practice of speculators making profits by borrowing or selling the yen at low costs and reinvesting in high-return currencies, such as the British pound, the New Zealand dollar and the South African rand. Speculation that the Bank of Japan on Tuesday will leave rates unchanged and signal future rate hikes will remain gradual further weighed on the yen.

"The single most correlated trade in all of finance over the past two weeks has been the relationship of the [dollar/yen] to global equity markets," said Boris Schlossberg, senior currency strategist at DailyFX.com. "As equities rose and risk appetite returned, the [dollar/yen] rose as well and when equities sold off so did the currency pair."

Late in New York, the dollar was quoted at 117.49 yen, compared with 116.81 yen late Friday. The euro stood at $1.3291, compared with $1.3308.

The British pound traded at $1.9435, compared with $1.9418. The dollar changed hands at 1.213 Swiss francs, compared with 1.2076 francs.

U.S. stocks rallied Monday, lifting the Dow Jones Industrial Average by 100 points, as a boost from Asian and European markets overnight and a flurry of merger news -- including talk of a big merger between two European banks -- helped investors set aside recent concerns about the subprime mortgage market. See market snapshot.

Fed meeting ahead

The dollar rose against the euro Monday, rebounding from last week's losses as investors await an interest-rate decision from the Federal Reserve later in the week.

The Federal Open Market Committee, the Fed's policy-setting panel, starts its two-day policy meeting on Tuesday. Economists believe the Fed will almost certainly keep monetary policy on hold for the sixth consecutive meeting, maintaining its federal funds rate target at 5.25%.

The Fed will announce its decision at 2:15 p.m. Eastern on Wednesday.

Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York, expects the FOMC statement to downgrade the phrase stating "some tentative signs of stabilization have appeared in the housing market" and to also tone down the optimism pertaining to the phrase indicating "recent indicators have suggested somewhat firmer economic growth."

"The Fed has no choice but to issue a less optimist growth assessment" following the deteriorating of subprime lenders and the sharp decline in new home sales, he said. "Any renewed dollar declines...will depend on the extent to which the statement will downgrade its growth assessment."

The dollar registered little reaction to a report showing U.S. home builders were less optimistic about the housing market in March.

A monthly sentiment index released Monday by the National Association of Home Builders showed the NAHB/Wells Fargo housing market index fell to 36 in March from a downwardly revised 39 in February (originally reported at 40). Economists surveyed by MarketWatch were looking for a decline to about 38. See full story.

Slovak koruna at record

In other trading, the Slovak currency, the koruna, rallied to a record high on Monday after the country surprised the market by revaluing its currency by 8.5%, triggering speculation that other new members of the European Union will follow suit. See separate story.

Slovakia gained approval from the European Commission to revalue the koruna's central parity rate against the euro in a move to control inflation and prevent the Slovak economy from overheating. Slovakia is preparing to join the euro zone in 2009.

The new parity is now at 35.4424 versus the euro, compared with 38.4550 previously.

Elsewhere, China over the weekend hiked its interest rates by 0.27 percentage point for the third time in less than a year to retrain credit and investment and promote balanced growth.

The People's Bank of China raised its one-year deposit rate to 2.79% and its lending rate to 6.39%.

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